Latin America

Economic Snapshot for Latin America

September 16, 2014

Latin America’s economic growth prospects for 2014 remained under pressure in September and raised further doubts about how the region’s economy is going to perform this year and next. LatinFocus Consensus Forecast panelists cut the projections for the region from the 1.6% growth rate expected last month to 1.3%. September’s result represents a notable downward revision to the region’s economic outlook and marks the 17th consecutive month in which forecasters have lowered the projection. 

If the current estimate of a 1.3% expansion is met, this will represent the slowest pace of growth since 2009. This month’s downward revision reflects analysts’ less upbeat prospects for 6 of the 11 economies surveyed, which included sizeable cuts in the forecasts for Brazil, Chile, Peru and Venezuela. Economists left their growth estimates unchanged for Colombia, Mexico and Paraguay, while prospects for Bolivia and Ecuador improved. Latin America’s economic outlook for next year surprised on the downside again in September. LatinFocus survey participants lowered the region’s GDP growth estimate by 0.2 percentage points compared to last month’s forecast and now expect the economy to grow 2.5% in 2015.

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The deterioration in Latin America’s economic outlook came within the context of rising uncertainty about the global economic recovery. After three consecutive months of downward revisions, the outlook for the global economy stabilized in September. FocusEconomics panelists expect the global economy to grow 2.8% this year, underpinned by improving prospects for the U.S. economy, which compensated for a deterioration in the outlook for the Eurozone and Japan. The U.S. economy is continuing to recover, although slowly, and the Federal Reserve is expected to change its rhetoric gradually, which suggests tighter monetary policy going forward. 

On the other side of the Atlantic, the Eurozone’s recovery remains fragile. The region’s economy cooled in the second quarter and, with inflation at exceptionally low levels, fears have arisen that the common-currency area may enter a growth-threatening deflationary scenario. As a result, the European Central Bank announced new monetary stimuli at its 4 September monetary policy meeting and kept the door open for additional measures aimed at revitalizing the economy. In Eastern Europe, the conflict between Ukraine, Russia and the West dominated the headlines in the beginning of September. The European Union announced a new wave of sanctions against Russia on 8 September, which are expected to continue eroding confidence and investment plans in the country. Russia has responded to the new measures by warning that it will block international flights through its airspace and restrict the import of additional goods from the European Union. Geopolitical uncertainty and the escalation of the crisis are weighing on business and consumer confidence within Europe, which will limit recovery.

Within the economies of Latin America, a notable diversion in growth prospects persists despite there having been a deterioration in the region’s economic outlook. Countries with unsustainable economic policies, such as Argentina and Venezuela, are showing a deep economic deterioration. The Argentine economy is expected to contract 1.1% this year, which is down 0.2 percentage points from last month’s forecast. In the ongoing struggle between Argentina and the holdouts, the Congress approved a controversial bill allowing the government to change the payment location of the structured U.S. bonds from New York to Buenos Aires or Paris via a debt swap. The government is aiming to by-pass U.S. District Court Judge Thomas Griesa’s ruling requiring Argentina to fulfill payment to both regular creditors and the holdouts at the same time. Most analysts agree that the debt swap will be difficult to implement and therefore the default will last longer than expected. This is likely to increase the risk of debt acceleration and fiscal deficit monetization, which will result in inflation accelerating further and instability in the country’s foreign exchange (see details on page 21). 

Meanwhile, forecasters slashed Venezuela’s GDP growth projection for 2014 from the 1.9% decrease expected last month to a 2.5% contraction. President Nicolas Maduro announced a cabinet reshuffling on 3 September in which Rafael Ramirez was removed as Economy Vice President, Oil and Mining Minister, and President of the state-owned oil firm PDVSA. The cabinet changes were mostly a political move and, according to analysts, Ramirez’s exit increases the likelihood that there will be further policy inaction, which highlights growing uncertainty, lower confidence among businesses and consumers and a deterioration in macroeconomic conditions going forward (see details on page 109).

Andean economies Chile and Peru each registered a notable deceleration in economic activity in Q2 and additional data for Q3 do not yet suggest that a rebound is on the horizon. In Q2, Chile’s GDP expanded 1.9% over the same period last year, which was below the 2.4% increase observed in Q1. The drag on economic growth in Q2 was caused by a sharp deterioration in fixed investment and was exacerbated by a slowdown in private consumption. LatinFocus Consensus Forecast panelists expect the Chilean economy to expand 2.2% this year, which is below the 2.7% increase that was expected last month. In Peru, GDP growth slowed substantially from 5.1% in Q1 to 1.7% in Q2. Q2’s result was the slowest since Q3 2009 and reflected a deterioration in the country’s external sector, although decreasing investment also contributed to the slowdown. Economists polled by LatinFocus revised their 2014 growth projections for the Peruvian economy down from last month’s 4.5% increase to a 4.0% expansion.

Economic growth in Latin America’s powerhouses Brazil and Mexico is still uneven. In Brazil, GDP fell a seasonally-adjusted 0.6% over the previous quarter in Q2. The reading followed the revised 0.2% contraction registered in Q1 (initially reported: +0.2% quarter-on-quarter), indicating that the Brazilian economy entered a technical recession. Fixed investment led the decline, plummeting 5.3% in Q2 and posting the fourth consecutive quarterly contraction. The plunge in fixed investment reflects a sharp deterioration in business confidence, which was affected by ineffective economic policies, uncertainty about the next government, and a stagnant industrial sector. 

Brazil’s 5 October presidential elections are too close to call. Recent polls show that Maria Silva from the Brazilian Socialist Party holds a slight lead over President Dilma Rousseff. The country’s economic policy and how to invigorate the economy in the wake of the ongoing lackluster performance have taken center stage in the presidential debate (see details on page 36). Against a backdrop of deteriorating economic activity in Q2 as well as lower confidence among Brazilian businesses, LatinFocus Consensus Forecast panelists lowered their GDP growth projections from the 1.0% expected in August to 0.5% in September. 

In Mexico, GDP grew 1.6% annually in the second quarter, which marked a slight moderation compared to the 1.9% expansion registered in the first quarter. A quarter-on-quarter comparison, however, indicates that economic activity grew solidly in the second quarter. GDP expanded a seasonally-adjusted 1.0% over the previous quarter, which came in well above the 0.4% expansion observed in Q1. Moreover, the first indicators for Q3 point to a moderate but sustained recovery in the coming months. On 5 September, the government sent the 2015 draft budget to Congress in which it calls for a deficit of 4.0% of GDP in total public sector borrowing requirements (previous estimate: 4.2% of GDP). The government stated that running a deficit next year will stimulate economic growth. LatinFocus Consensus Forecast panelists left Mexico’s GDP growth forecast unchanged at last month’s 2.5%.

The central banks of Brazil and Mexico decided to leave their policy rates unchanged in early September at 11.0% and 3.00%, respectively, and are expected to maintain the rates at these levels until the end of the year. The Central Bank of Colombia, however, decided to hike the policy rate from 4.25% to 4.50%, with the aim of preventing rising inflation amid strong economic growth. Monetary authorities in Chile and Peru cut interest rates by 25 basis points. Both banks took these decisions in order to propel faltering economic growth amid low inflation pressures.

Inflation expectations for the region increased again in September, which mainly reflects higher inflation in Venezuela. LatinFocus panelists raised their inflation forecasts for 2014 by 0.4 percentage points and now expect the regional average to close 2014 at 12.5%. Economists also raised their inflation projections for 2015 and now see inflation closing next year at 11.2% versus the 10.2% projected in August.

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